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Rojo Mexican Bistro turns to alternative financing to grow

Merchant lenders carve financing niche between banks, online firms

Dan Linnen and Joe Vicari had been partners for years, building up a restaurant empire. Linnen owned the Novi outpost of Andiamo Restaurant, the flagship brand in Vicari's Andiamo Restaurant Group (now Joe Vicari Restaurant Group), and the pair launched a midrange Mexican concept, Rojo Mexican Bistro, in 2008.

But last year, the pair realized they were ready to part ways. Vicari wanted to focus on the future of Andiamo, while Linnen was passionate about growing Rojo.

To do that, Linnen needed to buy the concept — and breakup cash isn't something that banks are usually keen to lend. So Linnen turned to New York City-based Strategic Funding Source Inc., which makes the kind of loans that banks seem to be allergic to. It specializes in "alternative" financing, also known as merchant cash advance lending.

Linnen had spoken with several lenders, but without collateral, they weren't interested in the risk. After all, no matter how cushy his chairs or extravagant his kitchens, they're worth peanuts on the resale market if he defaults.

And even if Linnen had the collateral, small-business lending is still paltry. Less than 20 percent of all loans were approved by big banks in May, according to the Biz2Credit Small Business Lending Index. Small banks had better results, with slightly more than half of applications approved.

"I wanted to do for Mexican food what P.F. Chang's did for Asian food," said Linnen, 49. "I want to deliver Mexican food in a more contemporary environment. Blankets on the walls and sombreros, that's really what people think of Mexican; they think down and dirty. We wanted to make it family friendly as well as hip and cool for the date-night crowd."

Algorithms, plus a human touch

Strategic Chairman and CEO Andrew Reiser

Strategic Funding got its start seven years ago, lending against credit card receipts for restaurants and nail salons. Since then, the company, which operates nationally, financed nearly 250 businesses in metro Detroit, with an average loan amount of $29,000 repayable over nine months.

"Banks are all about managing risk," said Strategic Chairman and CEO Andrew Reiser. "So are we, but banks understand risk in a much different way than we do. Collateral is not what we look for; we look at the cash flow of the business and the personality of the owner and how we can help them grow."

When Reiser got into the business, few of these lenders existed. But in the wake of the recession, they've popped up everywhere, especially online, touting the ability to get small-business owners cash quickly, often within a week of application.

Today, SFS, which was called "one of the most experienced firms in the industry" by Merchant Processing Resource, is competing against sites, such as Kabbage Inc., that use online data — including Yelp reviews — to underwrite loans. These notes often come with high rates and short repayment terms. A Kabbage loan of $29,000, for example, brings with it an average fee of $3,480 and a maximum six-month repayment term.

Reiser sees his company as the sweet spot between the banks and these online lenders that focus on algorithms.

"We use the algorithms, but we also have the human touch in our decision process," he says. "It's technology with insight."

That allows Strategic to offer interest rates that range from the midteens to low-30s with repayment terms of up to 18 months. Even doing that, the company keeps defaults at just 5 percent, which is "appalling" to banks, Reiser said, but good for the industry.

Linnen wouldn't reveal the size of his loan or the interest rate, but he said he's comfortable with the deal.

"It's capital that is more expensive than traditional bank financing," he said. "It is what it is, but it's cheaper than giving up equity or bringing on a partner. In this environment, it's great to have a strategic partner."

That was significant over the winter, when the polar vortex kept customers away from Rojo's four locations. The repayment agreement is structured against revenue, so as a business does more volume, the payback increases.

"Everyone felt the crunch in January and February," said Linnen. "So to have a payback that followed along with our business volume, well, they were right there to help. They are really interested in making sure that you are able to get through any difficult period of time."

The whole burrito

Going forward, Linnen is reviewing all of the restaurants, tweaking layouts and even looking at the menus in preparation for growth. The restaurants currently do $10 million in revenue, but he wants to ramp that up and open in other markets.

Reiser, too, is looking to growth for Strategic. The company, which employs 115, is investing in a greater variety of industries, thanks to the algorithms that it has created. He even sees auto suppliers and manufacturing becoming a bigger client base.

"It has given us the ability to finance all businesses as opposed to just retailers," he said. "It has opened up the market. Our industry is becoming a scalable small-business lender.

"This is something that we never anticipated a year and a half ago. We are seeing companies from all industries come to us."